UPA's Land Act may end up benefiting Chinese industry more than Indian farmers

The UPA’s growth-damaging Land Acquisition Act will have long-term consequences for Indian manufacturing if it is not significantly amended. It could end up benefiting Chinese manufacturers more than the Indian farmer whom it was intended to benefit.

Nitin Gadkari, the Surface Transport and Rural Development Minister, has planned to make changes in the Act, but given the negative attitude of the Congress to legislation proposed by the NDA - which is a reversal of the scenario when the UPA was in power and BJP the spoiler - it is anyone’s guess if these changes will happen anytime soon. Even in the case of the Insurance Bill, which the Congress was all in favour of, the Congress party wants a relook. It is likely to put up a huge fight if the BJP proposes changes in the Land Act, which it considers to be its prime pro-farmer achievement.

For large land acquisitions, the elaborately named Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Ac t, 2013, mandates the payment of four times the market value in rural areas, and twice market prices for land close to urban agglomerations.

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The ground reality is that land prices have already shot through the roof, and a BusinessLine report today (4 August) says that the “cost of land now accounts for 20-25 percent of project cost.” In states like Maharashtra and Gujarat, land costs an average of Rs 1 crore an acre, and if the equipment cost per acre of land is around Rs 4 crore, the minimum revenues needed to bankroll such investments would be Rs 20 crore for a factory needing around four to five acres of land.

On the other hand, companies already well endowed in the land department will find land more lucrative than their existing main line of business.

Firstbiz, using Capitaline data, ran a check on BSE 500 companies and found that at least 21 of these companies had land valued at over Rs 100 crore each (as per the latest annual reports now available). The value of their land banks added up to more than 5 percent of total assets. Our calculations exclude land leased by the companies concerned. If we were to take that into account, the share of land in assets would be even higher.

In our data, the most landed company would be Escorts, whose freehold land is valued at nearly 46 percent of total assets (Rs 1,082 crore is land value out of total assets of Rs 2.310 crore). Ceat, Arvind, HSIL and Prism Cement are other companies with more than 10 percent of land in their asset books.

This change in the value of land (and potential land acquisitions) has huge implications for the future of Indian manufacturing and infrastructure.

First, when land costs become a quarter of your costs, you will have to generate higher margins to be viable. This means companies will use more sophisticated technology and less labour to generate such incomes. A factory using more labour and less sophisticated machines will often need more land.

Second, land in the interiors may be cheaper, but few would venture there without the infrastructure. Since the Land Act will make land acquisitions for infrastructure development itself much higher (not to speak of cost escalations due to delays in acquisition due to minimum consent clauses), transport costs on unviable infrastructure will raise costs all around anyway. Manufacturing will be expensive both at existing locations and new locations in the interior.

Third, the one group what will benefit hugely from the change will be companies which already own a lot of land **(see table)** . Such companies will sometimes find that they can make more money by developing the land they fortuitously own, than by investing in their core businesses. Manufacturing companies may this prefer to dabble in real estate rather than stick to their core business.

Four, in order to economise on land use, companies will find it easier to become trading companies. Not that this is not already happening, but costly land will ensure that Indian companies will avoid manufacturing too much here, and instead import cheaper goods from China or elsewhere and repackage them for local sales. India’s trade deficit will worsen. The Land Act is something China will applaud.

Five, building Modi’s 100 smart cities will also become unviable as new cities need lots of land situated near a major transport node.

India will pay a huge price for UPA’s Land Act, if it is not changed. The irony is this: when land is very costly, it makes sense for farmers and other landowners to sell. But the jobs needed to absorb those who want to sell their land and take up other vocations will not be forthcoming, as factories and infrastructure have become less viable.

Truly, a catch 22 situation of our own making. Not for nothing is the Land Act called the UPA's worst legacy .